Tuesday, October 9, 2012

Regret Aversion by Autoproxy

My previous posts on regret leave smudgy the source of asymmetric information. When considering the euvoluntarity of insurance sales, used car transactions or the patronage of fine art, we typically analyze the nature of information asymmetries as a two-agent problem. The agent with the information advantage can end up having some severe problems with markets unraveling as the other side second-guesses signals and trustworthiness. With the way I've modeled regret, you might think of the worst problems being in cell 4: high information asymmetry and high search costs. Since folks well understand that these problems exist, there exist institutions like actuarial science, product underwriting and good ol' reputation.

What happens when it's your own brain generating the information asymmetries?

If you're a fan of Daniel Kahneman and Amos Tversky, you'll be familiar with the affective and the deliberative mind. If you're a fan of Robin Hanson, you'll be familiar with near-mode and far-mode thinking. A reasonable contrast between affective and deliberative reasoning is that the affective mind relies heavily on heuristics and intuition: it's atavistic and it reacts quickly. It's the system that lets us perform tasks we already know pretty well. As I'm typing, I don't have to hunt and peck for my letters, because my affective system knows where the keys are. My deliberative system tells me what words to write, as each sentence that rolls off this little assembly line is something new under the sun. The deliberative system is cool and calculating, more likely to carefully weigh the contents of a balance sheet. Certainly, both systems are prone to failure: affective reasoning can fall afoul of inappropriate heuristics and the deliberative system can run into some nasty problems with incomplete accounting or non-ergodicity.

The Lieberman-Trope construal level theory that has been folded into economics by Robin Hanson is a slightly different take on decision-making that relies on a cognitive distance analogy. Increasing distance reduces graininess and enables more abstract thinking. For the purposes of this here post, the present is near, the future is far.

Now consider what happens with regret when we pit these systems against each other. Now, instead of two individuals, we consider information asymmetries within a single mind. The near-mode me who relies on affective reasoning may light up that cigarette or guzzle that rotgut or... what, eat (inject, smoke? I have no idea how this works) that crystal meth, over the pitiful objections of my far-mode, deliberative mind. This conflict is a plausible source of what Buchanan refers to as "parentalism", where folks know they have this failure of willpower, where the rider can't control the elephant and they wish for an external drill sergeant to whip them into shape. Unfortunately for the well-intentioned paternalist, there may be no good way to ex ante distinguish between cases that will result in true regret and those that don't. Furthermore, there's a rather nasty selection problem when it comes to ex post regret expression: satisfied customers infrequently speak of their approval, leaving loud hair-tearers, tooth-gnashers and clothes-renders to fill the silence. It's easy to overestimate the level of regret in such an environment, tipping the distribution in the direction of non-euvoluntary.

So how do we conquer problems with willpower? Click the tag for "voluntary coercion" for some good examples. These aren't perfect, as they still require a moment of lucidity to opt in to these schemes and it may be that due to a person's initial endowment that they may not even realize they have a problem. Still, these solutions are plausibly preferable to the unfortunate consequences of direct state intervention. Yes, illicit drugs can be bad for your health, but prohibition breeds violent crime. This tradeoff strikes me as both deontologically and consequentially unacceptable.

So if I might pose Andrea's question again, so what? We know that people have problems with regrettable decision-making, we know that gross intervention carries costs, and we know that voluntary coercion may be insufficient for some folks. What's a euvoluntaryist to do? What civil institutions could plausibly exist in a reasonable counterfactual state of the world that might solve some of these problems? What are some reasonable policy steps to un-muzzle these institutions?